Future proofing energy contracts in a time of change

Found in: Blog

There can be little doubt that the legislative and regulatory landscape in the Energy industry has be characterised by change and uncertainty.  With a Federal election looming, this climate of uncertainty is unlikely to change any time soon.  When entering into new contracts (or extending the terms of the existing contracts) there is a risk that during the term of the contract the law may change in ways that that the parties did not anticipate.  It is therefore critical to try to “future proof” contracts to provide maximum protection against unwanted consequences of such changes.

Grondal Bruining will be publishing a series of articles with tips on how you can future proof your energy contracts, specifically looking at:

  • using specific carbon clauses vs general change event clauses;
  • the key factors to consider when drafting change event clauses;
  • considerations for passing through financial consequences of change events; and
  • how to mitigate non-financial consequences – something that, in our experience, tends to be overlooked in most contracts.

 Using specific carbon clauses vs change event clauses

Traditionally parties have sought to mitigate risks associated with the changing clean energy landscape in two main ways - specific carbon clauses and more general change event clauses.

Specific Carbon Clauses

In the years leading up to the Clean Energy Act 2011 (Cth) (CEA), it became quite common for parties to include a “carbon clause” in their contracts.  This type of clause typically provided that one party would be liable for any “carbon costs” associated with the supply made under the contract and allowed for the pass through of those costs to the other party.  Sometimes they also contemplated the transfer of liability for embodied emissions between parties (where permitted by law). 

Many of these clauses were drafted with a specific legislative scheme in mind, depending on the prevailing political climate at the time – for example, the Carbon Pollution Reduction Scheme or the CEA.  Even after the repeal of the CEA, some parties are still using outdated template contracts that contain carbon clauses which specifically refer to the CEA!  This is one of the main problems with using a specific carbon clause – that they can be drafted too narrowly to properly respond to future changes.

Given the current state of uncertainty regarding the clean energy legislative landscape, it can be risky to rely solely on a specific carbon cost clause to future proof a contract.  Until the details of any clean energy scheme are known, there is a risk that the definitions and mechanisms included in the carbon clause will not align properly with the actual scheme that is implemented.  Even if the details of the clean energy scheme are known, given recent experience in Australia these is still a real risk that the clean energy scheme will be amended, repealed or replaced over the life of a long term contract.  So although you may draft a carbon clause with a particular scheme in mind, you may later find yourself trying to apply it to an entirely different scheme (with less than successful results).

Does this mean that specific carbon cost clauses should not be included in contracts?  No - but if you are going to include a specific carbon clause we recommend that it be drafted in a manner that is broad enough and flexible enough to adapt to different types of clean energy regimes.  Carbon clauses can also be layered with other protections, such as change event clauses, to offer greater protection. 

If you do seek to include multiple layers of protection in your contract, it is important to consider how they interact, and how potential inconsistencies will be resolved.  For example, it is relatively common to see clauses in gas sale contracts that provide that one party is liable for imposts upstream of the delivery point, and the other party is liable for imposts at or downstream of the delivery point.  However, this type of clause could conflict with a carbon cost clause that provides that imposts relating to carbon emissions will be borne by parties in a particular way.

 Change event clauses

The second main way of future proofing contracts is through the use of a more general "change event" clause.  In its simplest form, this type of clause typically provides that if there is some sort of triggering change event, such as a change in law or a change in tax which has a net financial impact on the supplier, then the supplier may pass through that financial impact to the customer.  However, this type of clause can also be used in more sophisticated ways – for example, it can be to address non-financial impacts of a change event.

Given the current uncertainty, the flexibility of change event clauses seems to be generally the preferred way of addressing risks associated with the clean energy landscape.  It is important to acknowledge that change event clauses are not limited in application to clean energy related changes – they can be used to address any type of change event.  But change event clauses still require careful consideration to get them right. 

When drafting a change event clause it is useful to keep in mind the following matters:

  • the scope of the change events that you want to capture by the clause;
  • the ways in which the change event might be implemented;
  • when the change event would need to occur to trigger the clause; and
  • what potential consequences may arise out of the change event and how you want to address those consequences.

The next future proofing article will focus on these questions, and how they might influence how you draft a change event clause.

Don’t hesitate to contact Grondal Bruining to discuss your situation or for advice about future proofing your energy contract.

Yvonne Jansen, Principal
Grondal Bruining

Email: yvonne.jansen@grondalbruining.com.au

Phone +61 8 6500 4300